How gray market importers profit from tax system loopholes

With the looming revisions in the excise tax for automobiles, which forms a key component of the proposed TRAIN (Tax Reform for Acceleration and Inclusion) law, the automotive industry is abuzz on how the industry will evolve, and how the market will react.

A variety of versions and projections on how it will impact the actual retail price of vehicles has been presented by a variety of media outlets.

However, speaking to a number of automotive executives in different car companies, everyone in general has expressed that the assumptions and projections are way off the mark, simply because the net import price is an unknown.

This is a closely guarded secret that the car companies hold dear to their chest.

Without knowing the actual net import price, we, the general public, cannot make any realistic guess-timate on how the revised taxes will affect the actual prices of cars on the road.

However, that is not what I’d like to discuss. Rather, I’d like to tackle some another issue that should be addressed by the government with our tax system getting its first major overhaul in 20 years.

Bane of established
industry

Gray imports have been the bane of the established automotive industry, meaning the legitimate importers, distributors, dealers and assemblers/manufacturers in the country.

The main argument is that legitimate importers invest heavily on infrastructure, manpower, training, equipment, and real estate, and pay all the right fees and taxes, plus provide after-sales service, support and of course warranty.

The industry provides livelihood for millions, from factory workers, office workers, salesmen in car dealerships, and OE parts suppliers.

Gray market importers argue that they are able to bring in, and sell similar cars cheaper, which makes them more accessible to the market.

Higher prices

Of course, legitimate official importers will argue that their prices are higher because of the following:

1. They pay the full amount of import-related taxes as mandated by the government mandated by the Bureau of Customs.

2. They (along with OEM supplier industry) pay the proper income taxes based on company earnings.

3. They pay EVAT on every vehicle they sell, as well as spare parts and consumables, services, etc.

4. Through the people working in the entire automotive industry and the supporting OEM suppliers, these individuals pay income taxes to the government

This is, for the most part, true.

When I asked a gray market importer, he admitted that the cars they bring in are often under the name of an individual, or a generic trading/holding company, to allow them to slip underneath the radar.

When I asked my friend if they pay any form of taxes aside from the import duties and levies (meaning income tax relating to the sale of their vehicles, or EVAT), he grinned, and said no, because when they sell the cars, it is a private, personal transaction most, if not all, of the time.

The Land Transportation Office (LTO) will be the only government agency that would record the transaction, mainly through the transfer of ownership.

But the LTO has no bearing on taxes in this case. And let’s not even get into whether gray market importers pay the correct amount of taxes or not, as this is opening Pandora’s box and will require a full column in itself.

The second is the issue on money-laundering, which is related to the gray market imports.

Overheard from another person in the automotive industry, is that gray market/gray import cars are a popular means of bringing back and laundering ill-gotten wealth.

A number of high—profile politicians and/or criminal organizations who have their millions of dollars safely tucked away abroad would need to bring in money for upcoming elections (vote-buying, etc.) and other illegal/illicit activities.

They cannot, of course, just wire-transfer money, nor would they risk physically bringing in the cash.

So they will purchase a variety of expensive, high-end vehicles abroad, and import them into the country, then dispose of them, converting their high-end vehicles right back into cash.

But this transaction falls under the radar of Anti-Money Laundering Council as it bypasses banks and other financial checks. Free and easy money laundering, if a bit tedious and long-winded. But highly effective, nonetheless.

The gray market auto industry is highly unregulated. It is literally a free-for-all. There is indeed a market, a segment, a niche for this.

Certain car brands and car models are still to be officially present, or are very scarce, yet very high in demand on our shores, and why should we be deprived of these vehicles?

But government regulation is imperative. The government needs to create simple guidelines for gray market importers.

The government also needs to standardize its base import net prices for gray market vehicles.

This is something the Department of Finance can easily do: assemble a team of researchers who will research and monitor prices of vehicles worldwide.

Failure to establish a base import price for grey market vehicles means the government is being robbed everyday of potential income from import taxes in the order of tens, if not hundreds of millions.

The government needs to clearly identify and regulate who can import gray vehicles so that the government can still collect the right, proper and full amount of taxes, and the buying public is protected from unscrupulous businessmen and individuals who market their vehicles as fully tax paid, but suddenly get flagged down by the PNP-HPG to find out that the vehicles they are driving are tax-deficient.

While the owner/driver might not be liable for the tax deficiency, the vehicle can be impounded and confiscated.

In the same way as the government licenses companies who can import surplus trucks, car parts and engines, the government should issue a license to duly recognized and authorized gray market importers to be able to collect not just the right amount of import-related taxes, but also income taxes, as well as VAT.

If the government licenses only respectable businesses and individuals to import gray market vehicles, these will be held liable for tax deficiencies, thus protecting the consumer and allowing the government to monitor both buyer and seller, making tax evasion on the part of buyers more difficult.

Need I mention that money laundering will be better policed as well if government controls, regulates and licenses gray market importers, too?